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Are you planning to start investing to secure your financial future? Before you begin an investment plan, you may want to consider the various options available, to choose the right financial asset. The right choice of assets differs from person-to-person and goal-to-goal. Various assets such as equities and debt have different risk categories associated with them.
Here’s a detailed description of how debt funds, equity funds and direct equity investments can help you come closer to your goals.
Debt Mutual Funds for Short-Term Goals
Consider, you are planning to buy a new car. Investing towards a car purchase can be your short-term financial goal. To do so, you need to find the real value of your financial goal. For this, consider inflation. After determining the actual worth of your goals, you can begin an investment plan.
Here are a few points, you may want to consider before investing in debt mutual funds
- Nature of Funds
In debt funds, your money is invested in fixed-income securities such as government bonds, corporate bonds and non-convertible debentures etc.
- Tax
There are no tax benefits associated with debt funds. However, if your debt fund is held for more than 36 months, you will have to pay taxes at 20% with indexation. If you are investing in short-term debt funds, your capital gains will be added to your income, and will be taxed accordingly.
- Risk and Return
Debt funds fall in the low-risk category of mutual funds. This is because they primarily invest in risk-free bonds. Government bonds are virtually risk-free. However, while investing in corporate bonds, it is a good idea to check bond ratings from various credit rating agencies.
Debt funds offer returns over and above inflation. They belong to the fixed-income investment category. They offer more-or-less stable short-term returns.
Equity Mutual Funds for Long-Term Goals
Investing for a long-term financial goal can give you the time to plan and build a corpus. Building a strong retirement corpus is one such goal. Since the value of money decreases with time, you may need to consider a strong retirement corpus, by considering inflation.
Here’s how your equity-based fund profile will pan out:
- Nature of Funds
In equity-based mutual funds, investments are put into equities and equity-linked instruments. Generally, more than 65% of your money is invested in company stocks.
- Tax
You can also get a tax benefit by investing in Equity Linked Savings Scheme (ELSS). By investing in ELSS, you can save taxes up to Rs.1.5 Lakh . Therefore, you can convert your high-return investment into a tax-saving investment.
- Risk and Return
In the short-run, equities witness volatility. However, in the long-run, markets always march forward. Equity-based mutual funds fall in the high-risk, high-return category of mutual funds.
Direct Equity Investments to supplement your Income
To strengthen your earnings, you may want to consider additional options. Equity-based mutual funds and direct equities are good alternatives; however, they differ vastly. Additionally, you can also buy company stocks directly, as a means to add to your income.
Here is what you need to know on direct equity investments:
- Nature of Funds
You can invest directly in a company, by buying its stocks, thus becoming a shareholder of the company.
- Tax
Direct equity investments do not offer tax benefits. However, you will need to pay Long Term Capital Gains (LTCG) on these investments.
- Risk and Return
Unlike equity-based mutual funds, you can buy and sell company stocks as per your convenience. However, if you are investing based on a goal-based strategy, trading in direct equities may not necessarily bring you profit, during your stock sell.
To gain from direct stock investments, one needs to conduct a thorough market study and expertise.
Conclusion
Equity-based and debt mutual fund investments come with their basket of risks and benefits. However, for effective goal-based planning, you can benefit by investing in both. You may also want to consider direct equities, from time to time. To begin your investment journey, you can open a Demat account with reliancesmartmoney.com and chart out your path to success.
